TEXT-S&P affrms 'AA/A-1+' rtgs on Abu Dhabi-based IPIC;otlk stable

In accordance with our criteria, our view of an “almost certain” likelihood of extraordinary government support is based on our assessment of IPIC‘s:

-- “Critical” role for the government and the economy of Abu Dhabi as the government’s major investment arm for the long-term development and diversification of the hydrocarbon-based economy; and

-- “Integral” link with the government, its sole owner.

IPIC plays a critical role in public policy by implementing the government’s long-term development strategy, as outlined in its Economic Vision 2030 plan. Through its investments, it aims to develop the hydrocarbon and petrochemical industries, and implement strategic national projects with a view to securing demand for Abu Dhabi’s oil in times of crisis. IPIC operates on behalf of the government and implements projects approved by its board of directors, which includes senior members of the government.

We view IPIC’s link to the government of Abu Dhabi as integral. All members of the board of directors are appointed by the government. Three of the eight board members serve on the Supreme Petroleum Council, which formulates and implements Abu Dhabi’s petroleum policy, and is headed by the ruler of Abu Dhabi. Two further members of the IPIC board are members of the executive council.

In March 2010, Abu Dhabi’s department of finance took the rare step of declaring its “full and unconditional” support for IPIC, a company it deems “irreplaceable”. We continue to view this as a strong statement of support by a government in a region that typically avoids explicit public statements of this kind. Furthermore, Abu Dhabi has established a track record of ongoing support.

This support, coupled with IPIC’s operational proximity to the Abu Dhabi government, and repeated governmental capital increases, leads us to conclude that the government has the capacity, and willingness, to continue to provide substantial ongoing support to IPIC’s operations, and to intervene in a timely manner if the company were to require extraordinary financial support.

Given that we have equalized the ratings on IPIC with those on the government, its stand-alone credit profile (SACP) is not a primary ratings driver. IPIC’s SACP is, however, relevant because we could reassess our support assumptions in case the government allowed the company’s SACP to deteriorate to a vulnerable position. IPIC’s “satisfactory” business risk profile is supported mainly by strong asset quality, diversification, and a good profitability track record, offset to some extent by the cyclical nature of the oil and gas industry and an opportunistic acquisition strategy. The key weakness of the “aggressive” financial profile is relatively high consolidated financial leverage with adjusted debt to EBITDA of 9.6x and funds from operations to debt of 4.6%. We factor in some uplift in respect of ongoing government support in arriving at a SACP of ‘bb-'.

Outlook

The stable outlook reflects our view that IPIC’s integral link with, and critical role for, the government will remain unchanged, and that the company would benefit from the government’s extraordinary financial support, should the need arise.

We would likely lower the rating on IPIC if we were to lower the rating on the government of Abu Dhabi, or detect any weakening of the government’s commitment to IPIC. We could also re-evaluate IPIC’s critical role to the government if IPIC’s diplomatic or national security mandate were diluted. We could also re-evaluate IPIC’s role in this context because of growing diversification into non-oil-related investments through its majority-owned subsidiary, Aabar. A higher rating could result from an improvement in Abu Dhabi’s credit quality, to which the underlying credit risk of IPIC is linked.